Thursday, February 18, 2016

Baltimore Sun: With tax fraud on the rise, experts warn consumers to be wary

With tax season barely underway, state tax officials have already flagged several dozen Baltimore-area tax preparers for "suspicious" returns, while consumer groups are urging filers to watch out for fraud, errors and needless fees.

With identity theft and false returns on the rise in Maryland and elsewhere, experts say residents should carefully think through their options at tax time, especially low- to moderate-income filers who tend to be targets of predatory practices.

"The tax return is one of the most important financial documents," said Sara Johnson, director of the Baltimore CASH Campaign, which offers free tax preparation, mostly to low-income filers. "You need it to buy a house, apply for financial aid. If it's not done right, it can get someone in trouble. … Legally, it's a big headache to get undone."

Maryland Comptroller Peter Franchot has stopped processing returns from 37 commercial tax businesses at 41 locations this year and is investigating "suspicious" information. Unscrupulous tax preparers have cropped up as one concern in a wave of tax fraud and identity theft that's sweeping the country, including Maryland, he said.

"We have an issue with tax preparers taking advantage of citizens in Maryland by, on behalf of their clients, sending in clearly fraudulent requests for large refunds," Franchot said in an interview.
As returns came in earlier this year, his office identified 1,100 filings deemed "highly questionable" — reporting business income when the taxpayer did not own a business, inflating or failing to document business expenses, improperly claiming dependents, and other problems. Some have requested much higher refunds than the previous year or inflated wages and withholding information.
That first wave included returns from seven Liberty Tax franchise offices, mainly in low-income neighborhoods in the Baltimore area, he said. The investigation has since expanded to include 23 Liberty franchise offices as well as other preparers in the state; the comptroller is not releasing the total number of returns involved.
The comptroller's office does not have the authority to shut offices down, but won't process any returns from the flagged locations "until they prove to us they're on the level," Franchot said.
The comptroller is also pushing for his office to have greater authority to build criminal cases and has proposed a bill in the General Assembly that would allow his agents to issue subpoenas and search warrants in such cases. Fraudulent income tax cases in the state have jumped from 314 in 2007 to about 20,000 last year.

Liberty Tax, based in Virginia Beach, Va., has said its own compliance group will investigate its franchisees and cooperate with the state. Several independent preparers said they were either unaware of the state's moves or believe they are filing taxes correctly on behalf of their clients.
Terrelle Hartley, owner of Hartley Financial Enterprises, said he can't understand why the state stopped processing his office's returns.

"I guess this is more or less of a check, if anyone claims self-employment," said Hartley, who said about 40 percent of his business is from self-employed filers. "I don't even know what they are particularly looking for. My self-employed clients keep good books."
For now, his business is only able to file only federal returns.

"I can't do a full service, and that's causing clients not to file with me, and I don't make that much money," Hartley said. "It's peak season right now."
The comptroller's office is urging taxpayers to carefully review returns and to be suspicious if a preparer deducts fees from their refund or fails to sign the return or include a tax identification number.

Two consumer groups are also warning taxpayers of the possible pitfalls of using paid preparers.
"There's a minefield of dangers for the tens of millions of consumers who use paid tax preparers to fill out their most important financial document of the year," said Chi Chi Wu, staff attorney at the National Consumer Law Center, which issued an advisory with the Consumer Federation of America. "The hazards range from losing a chunk of their refund for unnecessary financial products to errors or even fraud committed by unregulated preparers."
Taxpayers could expose themselves to audits or criminal sanctions if preparers make errors or commit fraud, especially in states — unlike Maryland — where preparers are not required to meet minimum competency or training standards, the groups said. The advisory also warned about the lack of price transparency and firm price quotes ahead of time, when preparation charges can go as high as $400 to $500.

The CASH Campaign — short for Creating Assets Savings and Hope — has been inundated with calls for appointments for its free tax preparation services since the state suspensions surfaced and is heavily booked through the end of March, Johnson said. Though it mostly serves low-income filers, people who earn up to $54,000 qualify.

"We're trying to keep up with the demand," Johnson said.
The organization, in its 15th season running the IRS-certified Volunteer Income Tax Assistant program in the city and parts of Baltimore County, has found that tax filers are sometimes misled, missing out on benefits such as the Earned Income Tax Credit or are charged unnecessary fees, such as a fee to open a temporary bank account for a direct deposit refund. Additionally, fees often vary wildly or are not available up front, Johnson said.

"There's no transparency in what it costs to get taxes done," she said. "People get wooed by one entry-level price … and once in the door they realize they're being charged additional fees."
The consumer groups said that while banks are no longer making high-cost "refund anticipation loans," other risky or expensive products have taken their place. Some preparers are promoting refund anticipation checks, in which the taxpayer receives an up-front check from the preparer, who then collects the refund. But preparation fees are deducted from those checks along with an extra fee ranging from $25 to $60.

And payday and other nonbank lenders have continued to offer refund anticipation loans, some with annual percentage rates of as much as 240 percent.
Johnson advises taxpayers who are considering doing their own taxes to look into free software, such as that available through the Free File Alliance or My Free Taxes, which CASH promotes on its website.
The IRS website has electronic filing options available as well, including software from Free File and Free File Fillable Forms, available to a range of incomes for people who are employees, business owners or self-employed, said Jerry E. Beard of the Baltimore accounting firm Ellin & Tucker.
Richard Friedlander, a partner in the Owings Mills accounting firm Rosen, Sapperstein & Friedlander, said online tax filing services aren't for everyone, especially those who are unfamiliar with computers or fear making a mistake.

"Some people are just totally scared by the concept," he said. "Others are happy to sit and play with the computer program, but some aren't savvy."
Most people think taxes are "a mystery" and don't want to know more about them than they need to, Friedlander said, thus the need to pay for a tax preparer.
At services like Liberty Tax or H&R Block, "you go down there, and it's 15 minutes or two hours, and it's done," he said.

Jeff Lawson, an accountant and shareholder with Stoy Malone & Co. in Baltimore, said he had a client once who was facing an audit after going to an unscrupulous tax preparer and ended up having to pay back taxes and penalties.

"He said while he was doing it that it seemed too good to be true," Lawson said. "Don't always take things at face value — that's what I always tell people. You're hiring me to minimize your taxes but also to keep you in compliance."

In the end, he said, the taxpayer is "ultimately responsible for any errors that do occur."
Franchot urged taxpayers using a commercial service to, above all, read what's been prepared for them.

"If it says you have a hair styling business, and you don't have a hair styling business, you better correct it," he said. "Now that's getting looked at closely."

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